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Amazon-Disney Preorder Issue Could Just Be the Start

15 Aug, 2014 By: Chris Tribbey

Amazon has put Hollywood on notice.

From mid-May to late June, preorders for most Warner titles were unavailable on Amazon, with the two sides working out a new distribution deal. It marked the first time Amazon halted preorders as a negotiating tactic.

In August, the same began happening with disc titles from Disney. As first reported by Home Media Magazine, the preorder option for almost every title from Walt Disney Studios Home Entertainment had been removed on Amazon, including Captain America: The Winter Soldier (Sept. 9), Million Dollar Arm (Oct. 7) and Maleficent (Nov. 4). As with Warner, Amazon Instant Video early electronic sellthrough of new-release Disney titles ($14.99 for standard-def, $19.99 high-def) have been unaffected.

Neither Amazon nor Disney have responded to requests for comment, though analysts see this as a warning for the rest of Hollywood: Amazon is willing to play hardball with the industry’s biggest studios, in order to get what it wants.

“Yes, the rest of Hollywood should brace for similar tactics,” said Michael Pachter, analyst with Wedbush Securities. “Divide and conquer.”

He said Disney needs Amazon more than Amazon needs Disney, and that “Amazon investors don’t care if Disney merchandise isn’t available on Amazon, as third parties would have it available through Amazon.” Indeed, third-party sellers make up approximately 40% of Amazon’s sales, Pachter noted.

And despite Amazon Prime (the $99-a-year service that offers free two-day shipping on purchases and unlimited streaming access to content) having an estimated 27million users worldwide — and with Amazon planning to spend $100 million on original content during the third quarter alone — the Warner and Disney preorder battles aren’t about digital. It’s about better terms for disc. “[This is about] pricing only,” Pachter said.

Not everyone agrees that pushing digital isn’t playing a part.

During its late-July second-quarter earnings call, Amazon CFO Tom Szkutak told investors that “more and more Prime members are streaming free content” and the ability to access digital content is converting more people to subscribe to Prime. “Those customers are great customers,” he said. “In addition to streaming free content, they have great purchasing patterns, doing a lot of cross-shopping on physical products as well as converting to paid digital video and other digital products as well.”

Scott Tilghman, senior analyst with B. Riley and Co., said part of this battle over disc preorders is meant to push Amazon users toward digital purchases.

“I think there’s a digital angle to it, and I also think it’s about pricing as well,” he said. He noted that Walmart has gone after suppliers before, and Amazon is following a similar path to control costs with its retail model. And he agreed that Disney likely won’t be the last studio to go through this preorder mess.

“Amazon is a big enough retailer at this point with broad-enough distribution that you’d almost be shooting yourself in the foot if you wrote them off and said ‘We’re not going to deal with them,’” he said. “You see it across channels as well [with the well-publicized Amazon fight with book publisher Hachette], and Amazon is making a big push into digital.”

The end result of these preorder fights should be good for consumers, Tilghman argues. “Anything like this is going to be temporary, and I don’t know that the preorder business is as big for movies as it is for video games,” he said. “Consumers will either get better pricing or other perks, like lower digital costs, or more perks through Prime. I don’t think there’s any risk of alienating the customers.”

Richard Saintvilus, tech sector analyst with investment research news company Wall Street Playbook, isn’t so sure Amazon and its CEO and founder Jeff Bezos aren’t pushing too hard, saying it’s “remarkable” that Amazon “is willing to sacrifice market share to impose its authority.”

“But I don’t doubt for a moment that [Bezos] knows the endgame,” he said. “He wants to set the precedent for future publishers when they come to the negotiating table. This is the only reason — I think — this issue has become public.”

Amazon posted a loss of $126 million during the second quarter of the year, and anticipates losing as much as $810 million during the third quarter (with it dedicated to getting both the Fire Phone and Fire TV product lines to the mass market). That means the pressure is on from investors for the retail giant to generate a profit, and soon.

“Wall Street loves the top line but hates Amazon's bottom line,” Saintvilus said. “They’ve waited too long, and the company’s ‘growth at all cost’ mentality has gotten old. With pressure mounting, Bezos wants to both control the costs of content and finance Amazon’s growth on the back of publishers.”

Dan Jones, CEO of Avaring Capital Advisors in Shaker Heights, Ohio, noted in an article for Seeking Alpha that Disney’s home entertainment sales dropped 28%, from $2.44 billion to $1.75 billion, between 2011 and 2013. He’s of the mind that this preorder issue won’t hurt Disney much at all.

“No matter what kind of deal is or is not agreed to between Disney and Amazon, the fact that sales in the home entertainment category [for Disney] are declining suggests that the business is committed to developing its digital content distribution even more,” he wrote.


About the Author: Chris Tribbey

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